RBC Capital upgrades JD Sports, downgrades M&S

RBC Capital Markets upgraded its stance on JD Sports on Monday, but downgraded its rating on Marks & Spencer.

The bank upped JD Sports to ‘outperform’ from ‘sector perform’ and lifted the price target to 950p from 900p as it noted the company has been able to strengthen its position during the pandemic in the "attractive" sportswear category.

"We think a combination of stronger digital sales, and better margins in the US should drive upside to guidance and consensus later this year," RBC said. It said the consumer shift towards health lifestyles combined with good product innovation should be positive for the sportwear outlook.

"The majority of customers prefer to shop in a multi-brand environment and Nike is now moving to reduce its number of distribution partners, both of which should be positive for JD Sports," RBC said.

"Additionally, JD saw strong digitals sales over November and December, driven by strong ranges and availability, supported by the investments that JD has made in online. Although we anticipate the digital retention rate falling back in H1 FY22, we see potential for JD to receive a sales boost from omnichannel capabilities when stores reopen."

RBC also pointed to JD’s three acquisitions in the US over the past two to three years, taking its US exposure to 38%. It said the company’s most recent acquisitions of Shoe Palace and DTLR should allow it to engage more with the lower income demographic and that JD should see sales and margin opportunities as a result of these acquisitions.

"We think valuation remains reasonable given JD's double-digit sales growth and we see further upside should JD maintain its recent track record of superior execution and omnichannel sales growth."

Separately, RBC downgraded Marks & Spencer to ‘sector perform’ from ‘outperform’ and cut the price target to 150p from 160p as it argued the food segment is progressing well but clothing and international look more challenging.

"We think M&S is making good progress in food and we see upside risk to market estimates for its Ocado Retail JV," RBC said.

"However clothing looks challenged and we see further pressure short term for International."

RBC said the stock’s valuation is fair but "no longer in the bargain basement" as it was in mid-2020, hence the downgrade.

"We see more valuation upside for some other UK general retailers, such as Kingfisher and JD Sports,” it said.